First-Time Homebuyer Tax Credit: The New Act of 2021

The first-time homebuyer tax credit was to aid home buyers who don't see a home purchase as a realistic option until the market picks up and interest rates come down. This tax credit stood out because of its size and its requirement - only first-time home buyers were eligible. The first interaction of this program ended in 2010, but it reemerged in 2021. The tax credit is refundable and can be as large as $15,000 for eligible homebuyers. The program was introduced in April 2021 and is not effective at the time of writing.

What is the first-time homebuyer tax credit?

A tax credit is a government-backed incentive that enables select taxpayers to reduce the amount of tax owed. For instance, if you were required to pay $20,000 in federal taxes but received a $2,000 tax credit, you would pay $18,000. This tax incentive is a "better" approach to tax deductions since the latter only allows you to reduce the income tax. 

The first-time homebuyer tax credit is a tax incentive that lets people who never purchased a house enjoy a tax incentive. It's a refundable tax credit against federal income taxes that can help households save money during one of the most important economic turning points.

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Tax benefits for the first-time homebuyers

Since purchasing a home can be a very stressful experience, it is smart to take some time before making a purchase. You need to research everything there's to research regarding tax benefits and grants available for first-time home buyers.

The United States Department of Housing and Urban Development (HUD) has a very particular definition of a first-time homebuyer, so be sure to check their website to see if you qualify. If you do, there are many options available for you at the beginning of the homebuying process as you take out a mortgage loan to fund your purchase. These options include:

• HUD-backed programs. The official site has a separate section detailing funding options available to first-time home purchasers.
• Tax-free money from your individual retirement account. IRS allows you to take up to $10,000 from your IRA directly incurring no consequences, including a 10% early withdrawal penalty. These funds can help fund your purchase.
• State-backed programs. Certain US states can aid in the purchase of your first home by providing down payment assistance. Almost all the requirements have something to do with your financial status - only lower-income home buyers qualify.
• Section 184 loans. There are many tax benefits for Native American people eligible for this type of loan guarantee program that is only available to historically marginalized communities.
• Federal loans with tax incentives. It can be FHA loans, VA loans, or the HomePath ReadyBuyer program.

With your loan taken care of on advantageous terms, there are still additional tax benefits for first-time buyers, including:

• Mortgage interest deduction. You can send in Form 1098. A form that is used to report interest paid on your mortgage throughout the year. The interest accumulated has to be over $600.
• Mortgage points. They can be used as a deduction, which can help ease the financial burden.
• Property tax deduction. You can deduct up to $10,000 if you're eligible for this kind of deduction on property taxes.
• Energy tax credit. If you picked the solar panel installation route or settled on geothermal heat systems or wind turbines, you qualify for a tax credit of up to 30% if the installation process occurred sometime between 2022 and 2032. People that installed eco-friendly devices and made other energy-efficient improvements in 2020 and 2021 are eligible for a tax credit of up to 26%. For example, you may install energy-efficient windows and lower your tax liability.

First-Time Homebuyer Act

The First-Time Homebuyer Act itself was first introduced on 04/28/2021. Its current status is "awaiting a vote" since it was introduced to the House, but there were no subsequent actions. If The First-Time Homebuyer Act is eventually passed, anyone who acquires their first house would be able to qualify for a federal tax credit of up to $15,000. However, there are some requirements that a potential home buyer has to meet, including:

• Being a first-time house purchaser;
• Staying within the maximum revenue limit;
• Staying within the maximum home price limit;
• Purchasing a primary residences (principal residences);
• Being over the age of eighteen or married to a person over the age of eighteen;
• Buying a house from a person who is not related to them.

As of today, The First-Time Homebuyer Act is still in limbo. This article will be updated once changes to its status are known.

How does the first-time homebuyer tax credit work?

It is a tax credit, which helps people reduce the amount of tax they owe to the federal government. It is not a loan or a grant, or a tax deduction. Thanks to this tax credit, homebuyers can cover 10% of their home's purchase price. Still, the final sum must not be over $15,000, so the current maximum tax credit is $15,000. The important thing to note here is that inflation will be factored in: the maximum amount will be adjusted based on the inflation rate. You'll be granted a tax credit in 2021's money.

Here is an example of how this tax credit works. Let's assume that the year is 2002, and the inflation rate is 8%. The maximum amount you can qualify for is $16,200. If your first house is purchased for $300,000, you cannot receive $30,000 (it's the 10% you theoretically qualify for). You will receive $16,200 in tax credits, the maximum amount.

If you purchase a house in 2022 and the inflation rate is in line with the presumed rate the tax credit will follow (2%), your tax credit won't exceed $15,300. If you purchase a house that year for $100,000, you will receive $10,000 in tax credits.

How to qualify for the first-time homebuyer tax credit?

In case it's your first home purchase, some additional requirements still have to be met. They include:

• Purchasing a home to be used as a primary place of residence. If you already have a primary place of residence but are purchasing your first rental, this tax credit is not available for you. On the other hand, if you purchased a rental but haven't already purchased a primary residence, you will be eligible even as one of the real estate investors.
• Not owning a house in the past 3 years. This is self-explanatory, and there are no fine print requirements for this one.
• Not exceeding the income limit. There are varied income limitations - the buyer cannot have income that's more than sixty percent above the median average income for their place of residence. For instance, if the median income is $31,462, your income cannot be higher than $50,339.
• Being over the age of 18. There is a small loophole in that you can be married to a person over the age of 18.
• Not using the 2008 first-time homebuyer tax credit. You can use this tax credit twice, even if the previous iteration is quite dissimilar to what was introduced in 2021.

Additional requirements include not being able to purchase a home from a close family member. Remember that the list of eligibility requirements can change significantly by the time this tax bill is enacted.

Where to get first-time homebuyer credits?

Since this federal tax bill is not yet enacted, you can do no more than wait and hope that it will be easy to qualify for this tax credit. Minimal paperwork and clear-cut eligibility criteria should lead to an easy qualification process.

In all likelihood, the process of obtaining the credits will be similar to the past version of this tax credit program. You will have to fill out an additional IRS form, and that's pretty much it.

Expect to learn more information about the tax credits via future media releases by government entities. Also, expect to hear more about credit in various personal finance-themed online and offline publications.

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